Submitted to
Professor M. Vedavalli
By,
Abhishek Jain
Roll No- 201/2014
PGDM -Finance
Life Insurance is not for the benefit of the insured person, but it is for the persons loved ones. Its
primary purpose is to enable your family to continue their current lifestyle when and if you are no
longer around.
By word life need analysis we convey what actual amount would be needed to maintain the surviving
dependants for the period they remain dependants.
It provides ample information to establish the most effective means for that potential loss.
Considerations:
1.Personal.
2.Property.
3.Liability.
WHY DO WE REQUIRE LIFE NEED ANALYSIS?
Needs Analysis can help determine the right amount of life insurance that is appropriate for your needs.
It explains the overall principals behind estimating the costs associated with the death or disablement of
an income earner and the provision of ongoing support for any dependants and/or the insured.
Also outline the factors to consider in the planning the amount of cover for short term disablement or
illness. Again it explains how the value of property assets should be estimated for insurance purposes and
develop a comprehensive and integrated set of insurance policy options for the particular clients needs
and circumstances.
Life insurance provides several important benefits. First, life insurance provides an important financial
resource for your loved ones in the event of your untimely death.
The money paid to your beneficiaries is federal income tax-free. The death benefit also has the potential
to be excluded from your taxable estate if the policy is purchased inside an Irrevocable Life Insurance
Trust. Without this protection, a significant portion of your estate can be diluted by taxes. Life Insurance
trusts are beyond the scope of our discussion today, but this is an important feature that you should
remember to ask a financial advisor about should you worry you may have a taxable estate.
In addition, by bypassing the often lengthy probate process, life insurance benefits can be paid quickly
and directly to your beneficiaries to be used for funeral expenses or estate taxes. This feature may also
help eliminate the need for the liquidation of other assets.
But theres more to life insurance than you might realize. Certain types of life insurance can provide
additional benefits while you are living, such as accumulating a tax-deferred cash value that you can
access if necessary. This cash value can provide you with a supplemental source of income in the event of
a sudden medical crisis or help pay for retirement or education expenses. Loans and withdrawals will
decrease the cash value and death benefit.
In fact, life insurance offers several options that allow you to choose the right policy for your particular
lifestyle and financial goals.
Once youve decided that life insurance is a good idea for you, the next step is to determine how much
coverage you need. This is a difficult question to answer and often this is the point at which people get
overwhelmed and decide to put off their life insurance decisions even longer.
Life-Cycle Period
18-25 years:
May be in higher
education or first
job or probably
unmarried without
dependents.
25-40 years:
May have married
with kids/moderate
income with high
expenses, large
debts, etc.
40-60 years:
Children become
independent,
income may be
increase, debts
reduced
Above 60 years:
Normally retired life
Financial Needs
Needs support from
parent / might be
paying off study
loans, saving for
future needs.
Savings for
retirement, provision
for health expenses
Regular inflow of
money for selfmaintenance, health
needs, leisure needs
Solutions
Savings product may be
tried, as protection needs do
not exist.
Term plans(duration
linked to dependency
period)
Convertible plans
Mortgage redemption
plans
Child plans
Endowment plans(with
profit)
Unit-linked plans
Health riders
Retirement plans
Immediate annuities
30
1000000
35
0.00% year
7.50%
Rs122,72,51
1.41
This is one of the basic methods of insurance calculation and is based on your current annual income.
Insurance needs = annual income * number of years left for retirement.
Let's say my annual income is Rs 10,00,000. And you are 45 years old with 15 more years for retirement.
In this case your insurance cover equals Rs 10,00,000 * 15 = Rs 150,00,000.
Another way in which income replacement works is to multiply the annual income by 10 (also
known as Income Replacement Multiplier).
Another variant states that the Income Replacement Multiplier changes with age .
AGE
INCOME MULTIPLIER
25-30
5-10
30-40
15-20
40-50
10-15
50-60
5-10
Some calculations also take into account any outstanding loan amount that you may have on your housing
loan, personal loan etc.
Let's say my annual income is Rs 10,00,000. And you are 35 years old.
In this case your insurance cover equals Rs 10,00,000 * 20 = Rs 200,00,000.
Premiums as percentage of income
This rule says that 6 percent of the breadwinners gross income plus an additional 1 percent for each
dependent should be spent on life insurance premiums.
So if you have an annual gross income of Rs 10 lakhs and have your wife and 1 child as dependents, then
your life insurance needs is calculated as per below
(6% * 10 lakhs) + (1% * 10 lakhs * 2)
The needs approach is not limited to fulfilling objectives in the event of death only. It also considers a
family's living needs, such as providing retirement funds and planning a child's education.